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Monday, May 17, 2010

Phil Flynn: Euro Melt

Asia plays catch up with last Fridays Euro Meltdown driving oil to a new 3 month low. Strength comes in numbers but at the same time, the numbers can bring you down as the small members of the EU are raising concerns that the Euro will be split. Those fears gained momentum when German Chancellor Angela Merkel said that Europe is in a “very, very serious situation” .Those concerns started a global aversion to risk going into the weekend as we saw the Euro move to a four year low. Today we want to find out if the market gains a sense of confidence as the market hopes that we will see bargain hunters step in. Yet whether they do or they do not, the one thing we do know is that the Euro problems have not gone away.

For oil and the products the market is living and dying with the fallout from the crisis. Oil has been propped up on the backs of a weak dollar and then a strong dollar and without that going for it, the focus falls back on the supply side facts for crude oil. Last week the Energy Information Agency reported that supplies of oil is at a record high at Cushing, Oklahoma which is the Nymex delivery point. The refiners have a lot of incentive to make gasoline with the crack spread this wide. The EIA says that the high crack spread is due in part to the switch to summer time grades of gas. The EIA says that May 1 marks the date for most of the country when more costly summer-grade gasoline is required (April 1 in southern California). The maximum allowable vapor pressure, which is measured as Reid vapor pressure (Rvp), is the primary distinction between winter- and summer-grade gasolines.

When the weather turns warm, a high vapor pressure increases the evaporation of the gasoline into the atmosphere. The volatile organic compounds that are released from gasoline into the air not only contribute directly to health problems, but also indirectly through the formation of ground-level ozone and smog. Gasoline vapor pressure is also important for an automobile engine to operate efficiently. Vapor pressure must be high enough to allow an engine to start easily, but it must not be so high as to lead to vapor lock, which stalls the engine when gasoline in the engine’s fuel delivery system prematurely turns from liquid to vapor.

Reducing gasoline vapor pressure to lessen harmful emissions and maintain car drive ability during the summer adds to refiners’ operating costs in the second and third quarters. Because of these higher costs, the rise in the crack spread during the summer months overstates the actual increase in the profitability of gasoline sales.The low for the year in oil of 6950 is the first big, long term target for oil yet with the stock market rebounding, we may not make it on this run. We think that longer term oil is headed much lower yet we still think the best way to play it is by the range. Make sure you call for our entry and exit points on every major market.

Phil can be reached at at pflynn@pfgbest.com and don't forget to watch him everyday on the Fox Business Channel